Anticipated acquisition by Odeon Cinemas Limited and Cineworld Cinemas Limited of Carlton Screen Advertising Limited

Affected market: Cinema advertising, film exhibition

No. ME/3632/08

Please note that the full text of the decision can be downloaded by using the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, third party views, assessment and decision.

The OFT's decision on reference under section 33(1) given on 1 July 2008. Full text of decision published on 17 July 2008.

Please note that square brackets indicate figures or text that have been deleted or replaced with a range at the request of the parties for reasons of commercial confidentiality.

PARTIES

Odeon Cinemas Limited (Odeon) is the UK's largest cinema operator with 108 cinemas (831 screens). Odeon is a subsidiary of Corleone Capital Limited (Corleone) and its ultimate parent company is TFCP Holdings Limited (formerly Terra Firma Capital Partners Holdings Limited), the private equity fund manager.

Cineworld Cinemas Limited (Cineworld) is the UK's second largest cinema operator with 72 cinemas (741 screens). It is a subsidiary of Cineworld Group plc whose main shareholder (with 46.8 per cent)[See note 1] is Blackstone Capital Partners (Cayman) IV LP.

Carlton Screen Advertising Limited (CSA) is a provider of cinema advertising services in the UK. It is a wholly owned subsidiary of ITV plc (ITV), a television broadcaster.

TRANSACTION

The proposed transaction will proceed by way of two separate steps. The first is the formation of a 50:50 joint venture (JV) between Odeon and Cineworld.[See note 2] The JV will be incorporated as Digital Cinema Media Limited (DCM).

The second step is that DCM will acquire CSA from ITV plc for £500,000.

The parties told the OFT that the rationale for the proposed transactions is to secure their cinema advertising revenues in reaction to CSA's financial difficulties and possible exit from the market.

JURISDICTION

The proposed transaction meets the merger jurisdictional thresholds of the EC Merger Control (ECMR).[See note 3]

The parties submitted to the European Commission (the Commission) a Reasoned Submission pursuant to Article 4(4) of the ECMR that the case be referred in its entirety to the UK. The Commission granted the parties' request on 23 April and under section 34A of the Enterprise Act 2002 (the Act) the statutory deadline in this case is 1 July.

As a result of the proposed transaction CSA will cease to be distinct from Odeon and Cineworld. Odeon and Cineworld together account for over 70 per cent of CSA's payments to cinemas and CSA accounts for around 75 per cent of cinema screen advertising in the UK. Therefore, the share of supply test in section 23 of the Act is satisfied with respect to the supply of cinema advertising screen time in the UK. The OFT therefore believes that it is or may be the case that arrangements are in progress or contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

THIRD PARTY VIEWS

Most third parties who responded to the OFT's questionnaire were unconcerned about the proposed merger. Advertising customers were unconcerned. Likewise, cinemas were generally unconcerned, although one commented that it was uncomfortable dealing with a supplier who would also be a competitor.

Distributors were concerned about what the proposed transaction meant for their trailers.  

ASSESSMENT

Odeon and Cineworld are the UK's two largest cinema operators. Together they intend to form a JV and acquire CSA, a cinema advertising provider.

The proposed transactions do not change the market structures in either cinema advertising or in film exhibition at the horizontal level. Therefore, the OFT does not consider that horizontal unilateral effects will arise as a result of the proposed transactions.

However, by bringing Odeon and Cineworld together via the proposed JV, the OFT did consider the possibility of coordinated effects arising in this case.

The OFT examined whether the formation of the JV itself could lead to explicit coordinated behaviour in the film exhibition market between Odeon and Cineworld. The OFT believed coordination on local admission prices would be the most likely form of potential collusive behaviour.

In examining this potential harm to competition the OFT undertook an extensive review of a large number of internal documents and emails relating to the proposed transactions. On the basis of this evidence, together with the shareholders' agreement which sets out how the JV will be operated at arm's length from the parties' film exhibition businesses, the OFT has concluded that the parties do not view the JV as a conduit for explicit information sharing, and subsequently that it is unlikely to increase the likelihood of collusion in this manner.

In addition, the OFT investigated what information Odeon and Cineworld were likely to receive through the running of CSA that they would not otherwise receive which may aid tacit collusion in film exhibition. While they would be privy to confidential information relating to growth forecasts and expansion plans for other cinemas, the evidence before the OFT indicates that such information becomes common knowledge within the industry before it could be used by Odeon and/or Cineworld in the setting of their own local admission prices.

Finally, the OFT examined whether the proposed transactions could lead to foreclosure of cinema rivals or Pearl & Dean (P&D). The OFT does not consider that there is a realistic prospect of such foreclosures. A refusal by CSA to supply advertising to a rival cinema is likely to induce that cinema to switch to P&D and is not likely to induce advertisers to advertise more in Odeon and Cineworld cinemas.

A refusal by Odeon or Cineworld to contract with P&D is not a merger specific effect since neither currently does contract with P&D. In any event, such a refusal would still leave approximately half of the UK's cinemas available for P&D to win advertising spaces from.

Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

NOTES

1. As of 5 February 2008. 51.2 per cent of its shares are publicly traded on the London Stock Exchange and two per cent are Management owned.

2. Odeon and UCI Cinema Holdings Limited (a subsidiary of Corleone) and Cineworld Group plc, known as JV Parents, will also be parties to the JV Agreement in order to bind Odeon and Cineworld's parent companies to the restrictive covenants.

3. Council Regulation (EC) No 139/2004.  

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